The Mathematics of Financial Modelingand Investment Management

21-Bond Portfolio Man Page 662 Wednesday, February 4, 2004 1:12 PM

662 The Mathematics of Financial Modeling and Investment Management

EXHIBIT 21.5 Sequence of Transactions Selected by Optimizer Showing

Progressively Smaller Tracking Error, $000s

Initial Tracking Error: 52.0 bp

Transaction # 1

Sold: 31,000 of COCA-COLA ENTERPRISES 6.950 2026/11/15

Bought: 30,000 of U.S. TREASURY NOTES 8.000 2001/05/15

Cash Leftover: −17.10

New Tracking Error: 29.4 bp

Cost of This Transaction: 152.500

Cumulative Cost: 152.500

Transaction # 2

Sold: 10,000 of LOCKHEED MARTIN 6.550 1999/05/15

Bought: 9,000 of U.S. TREASURY NOTES 6.125 2007/08/15

Cash Leftover: 132.84

New Tracking Error: 25.5 bp

Cost of This Transaction: 47.500

Cumulative Cost: 200.000

Transaction # 3

Sold: 4,000 of NORFOLK SOUTHERN CORP 7.800 2027/05/15

Bought: 3,000 of U.S. TREASURY BONDS 10.625 2015/08/15

Cash Leftover: −8.12

New Tracking Error: 23.1 bp

Cost of This Transaction: 17.500

Cumulative Cost: 217.500

Transaction # 4

Sold: 33,000 of GTE CORP 9.375 2000/12/01

Bought: 34,000 of U.S. TREASURY NOTES 6.625 2002/03/31

Cash Leftover: 412.18

New Tracking Error: 19.8 bp

Cost of This Transaction: 167.500

Cumulative Cost: 385.000

Transaction # 5

Sold: 7,000 of COCA-COLA ENTERPRISES 6.950 2026/11/15

Bought: 8,000 of U.S. TREASURY NOTES 6.000 2000/08/15

Cash Leftover: −304.17

New Tracking Error: 16.4 bp

Cost of This Transaction: 37.500

Cumulative Cost: 422.500

Source: Exhibit 15 in Lev Dynkin, Jay Hyman, and Wei Wu, “Multi-Factor Risk

Models and Their Applications,” in Frank J. Fabozzi (ed.) Professional Perspec-

tives on Fixed Income Portfolio Management: Volume 2 (New Hope, PA: Frank

J. Fabozzi Associates, 2001).